Edited version of your private ruling

Authorisation Number: 1012601063190

Ruling

Subject: Deceased estate - trust income

Question 1

Will the Trustees of the Estate be able to make a choice under section 115-230 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Issue 2

Question 1

Will the commissioner exercise his discretion under section 99A (2) of the Income Tax Assessment Act 1936 (ITAA 1936) to assess the trustee of the Estate under section 99 of the ITAA 1936 in respect of any capital gains for the years ended 30 June 20xx to 30 June 20xx?

Answer

Yes

This ruling applies for the following periods

01/07/20xx - 30/06/20xx

The scheme commences on

01/07/20xx

Relevant facts and circumstances

• Deceased died on dd/mm/yyyy.

• Probate was granted on dd/mm/yyyy.

• A copy of Probate and the last will and Codicil have been provided.

• The Will provides for the creation of four equitable life / remainder interests.

• The life interest provided for one interest in the will has already vested.

• The creation of an equitable life / remainder interest involves the creation of a Trust over property (a form of testamentary trust), being a trust estate for tax purposes.

• However, for investment and diversification purposes, the assets comprising the remaining residuary estate have remained pooled (that is, they have not been divided amongst the remaining equitable life / remainder interests). Otherwise the Estate administration was completed many years ago.

• Until the residuary Estate is divided amongst the remaining equitable life / remainder interests, whether or not administration is said to be complete, the separate trust estates / testamentary trusts do not exist for tax purposes.

• Accordingly the remaining residuary Estate Is being administered as a single trust estate, with equal life tenants (presently entitled income beneficences) groups of remaindermen.

• At some point of time the pooling may cease in whole or part by the creation of more testamentary trusts, one for each life tenant or the creation of one testamentary trust for one life tenant, with pooling retained for the other life tenants.

• The existing trust holds listed shares with no other assets and no material liabilities. Trustees may dispose of shareholdings in the ordinary course of the ongoing management of the investment portfolio.

• The life tenants, whether through the existing trust or separate testamentary trusts (if created), cannot have trust property representing all or part of a capital gain paid to or applied for their benefit.

• There is no ability under the will or at law for the Trustees to re-categorise or otherwise pay or apply all or part of the benefit of capital gains to any one or more the life tenants.

• The remaindermen are the only people who can benefit from capital gains though any such entitlement is dependent upon the death of the life tenants.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 99.

Income Tax Assessment Act 1936 Section 99A.

Income Tax Assessment Act 1997 Subsection 115-230(3)

Income Tax Assessment Act 1997 Subsection 115-230(4)

Reasons for decision

Issue 1

Question 1

Will the Trustees of the Estate be able to make a choice under section 115-230 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Detailed reasoning

Under the ITAA 1936, an income beneficiary who is entitled to a share of a trust's income is generally assessed on a similar share of the trust's net (or taxable) income. If the net income includes capital gains, the income beneficiary may be assessed on those capital gains even if, under the terms of the trust, they are not entitled to benefit from the capital gains.

Under section 115-230 of the ITAA 1997 the trustee of a resident testamentary trust can make a choice in respect of the capital gains that are included in the trust's net income so that the trustee, rather than an income beneficiary, will be assessed on capital gains of the trust. The trustee will be assessed on the beneficiary's share under section 99A or (at the Commissioner's discretion) 99 of the ITAA 1936.

The trustee who chooses to be assessed on the capital gains which would otherwise be assessed to an income beneficiary (or the trustee on the income beneficiary) can make the choice if, under the terms of the trust, the income beneficiary cannot benefit from the capital gains. This means that the tax on the capital gains is in effect borne by the capital beneficiaries of the trust who will ultimately benefit from the capital gains.

A trustee can only make a choice under this section in relation to a trust estate.

The trustee must choose to be assessed no later than the deadline in subsection 115-230(5) of the ITAA 1997. That deadline is the day two months after the last day of the relevant income year or such later day as the Commissioner allows.

Where the trustee makes this choice, the trustee is assessed under section 99A of the ITAA 1936 or, at the Commissioner's discretion, section 99 of the ITAA 1936.

Conclusion

The facts in your case show that the trustees comply with all of the conditions attached to the choice provisions.

The Commissioner will therefore accept the trustee's choice to be assessed on capital gains.

Issue 2

Question 1

Will the commissioner exercise his discretion under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936) to assess the trustee of the Estate under section 99 of the ITAA 1936 in respect of any capital gains for the relevant years?

Detailed reasoning

The net income of a trust to which no beneficiary is presently entitled is assessable to the trustee under section 99A of the Income Tax Assessment Act 1936 (ITAA 1936). Subsection 99A(2) of the ITAA 1936 reflects the policy that if it would be unreasonable for section 99A to apply to income of a deceased estate to which the beneficiaries are prevented from being presently entitled because the administration of a deceased estate has not been finalised, then section 99 applies. In part, Section 99A(2) of the ITAA 1936 states:

This section does not apply in relation to a trust estate in relation to a year of income, being a trust estate: that resulted from a will, a codicil or an order of a court that varied or modified the provisions of a will or a codicil. However, this is provided that the Commissioner believes that it would be unreasonable for this section to apply in relation to the trust estate for that year of income.

Sub-section 99A(3) of the ITAA 1936 addresses the factors that we consider in determining to exercise discretion to assess under section 99 unless there is tax avoidance involved.

CCH Federal Tax Reporter [51-020] Trust estates of deceased persons states:

Section 99A applies in the case of trust estates of deceased persons unless the Commissioner, pursuant to sec 99A(2), forms the opinion that it would be unreasonable for sec 99A to apply in relation to the deceased estate in relation to the particular year of income.

It should be observed that in forming an opinion for the purposes of sec 99A(2) the Commissioner is directed by the paragraphs of subsec (3) to have regard to certain matters (including ``such other matters, if any, as he thinks fit'') and that subsec (3A) extends para (a) of sec 99A(3) so that, in effect, in the case of a deceased estate, the Commissioner is required to have regard not only to the circumstances in which property and other rights are conferred on the trust estate itself, but also the circumstances in which property and other rights were conferred upon the deceased person. In Public Information Bulletin No 4 the Commissioner indicated certain circumstances and matters that he considers to be relevant or irrelevant for the purposes of forming an opinion under sec 99A(2) (see 51-060). In December 1978 the Commissioner advised the following details of the manner in which he proposed to exercise the discretion conferred on him by sec 99A(2) in the case of deceased estates:

(1) The Commissioner exercises, and will continue to exercise, his discretion in such a matter as to keep sec 99A as an instrument to prevent the avoidance of taxation by medium of trusts and not to use it when to do so would seem to him not in accordance with that purpose.

(2) A refusal to exercise the discretion under sec 99A in relation to ``shell'' trusts (ie avoidance devices) would be to use the section in the way described above.

(3) Whether or not a particular deceased estate gives rise to tax avoidance of the kind at which sec 99A strikes must, necessarily, be decided on the facts surrounding that trust estate. However, perhaps an example of a case in which the exercise of the discretion might be refused is one where a trust estate created by the death of a grandparent by the settling of a nominal amount allows the contribution of assets by the parent and this trust is used in conjunction with other trusts to accumulate income in the same manner that a group of related inter vivos trusts would have been used before the enactment of sec 99A. Further examples might be a trust where a more or less nominal sum has been settled pursuant to directions in a will and to which more substantial amounts have been contributed by loans, later forgiven, or where a number of trusts are created by settling nominal amounts on children, grandchildren, nephews or nieces, and these trusts are built on. The Commissioner said that he did not mean to imply from these examples that the discretion will always be exercised in respect of trusts where more than a nominal sum is settled. Indeed, the avoidance aspects of the examples mentioned are capable of operating in estates where substantial amounts are placed in trust by the operation of a will, etc.

(4) As to what distinguishing features a deceased estate of the ordinary and traditional kind bears, the Commissioner said that a very general answer to this must be that such an estate would be one whose assets come directly from the assets of the deceased person. Ordinarily the assets would be those of the deceased person, for example, a house or income producing property, or assets purchased subsequent to the death of the deceased out of funds arising from the sale or conversion of those assets by the executor acting in the course of his duties. Conversely, a ``$10 trust'', created by a will, whether one of a number of such trusts or not, could hardly be said to be a trust of the ordinary and traditional kind. The relationship between the deceased person and the beneficiaries under the trust is of some, although not necessarily overriding, importance. In the normal course of events, it is unlikely that anybody would create a trust for, or leave assets to, a person who is totally unrelated to him; although it must be recognised that this does occasionally happen. A definable relationship, ordinarily of blood or marriage, between the parties is something that is usually present in trusts that are of the ordinary and traditional kind.

(5) In determining the extent to which regard would be had to the types of assets held by the trust with particular reference to shares in private companies, the Commissioner indicated that at this stage, there was no intention of going beyond the guidelines laid down in Public Information Bulletin No 4 (51-060). The time of acquisition of the shares would be a factor to be considered in looking to see if there were any tax avoidance connotations present.

(6) Section 99A requires the Commissioner's discretion to be exercised in relation to each particular year of income and its exercise or a refusal to exercise in one year does not preclude different treatment in a subsequent year. The Commissioner indicated that to the extent that rectification or a change in the nature of the assets of the trust is required to sweep away any avoidance possibilities the year by year application of the provision will ensure that there is no impediment (at least from those causes) to the exercise of the discretion in the future if the Commissioner's objections are met.

(7) It may be taken as a general statement of principle that in cases where there have been special circumstances affecting the property or income of a trust estate that would, if continued, result in the discretion being withheld, those circumstances will normally be disregarded if they have ceased to be reflected in income derived after the commencement of the income year in relation to which the exercise of the discretion is being sought. Similarly, if there was a small carry-over into the year of income of ``adverse'' income and the Commissioner is satisfied that no further special arrangements will be entered into, the discretion may be exercised. Exercise of the discretion would, of course, depend on there being no other special circumstances that would warrant it being withheld.

Conclusion

In your case the trust estate is a deceased estate that resulted from a will. We consider that the trust estate is an ordinary and traditional estate where a substantial sum has been settled pursuant to directions in the will. There is a clear relationship between the deceased person and the beneficiaries. The beneficiaries are all family members, therefore a definable relationship, of blood or marriage, between the parties is present. Based on the information you have provided in your application the trust would be defined as a trust of ordinary and traditional kind and there is no intent of tax avoidance apparent.

We consider it to be unreasonable to apply section 99A of the ITAA36 to the net income of the trust. Therefore we will exercise the discretion to assess the trustee under section 99 of the Act at resident individual tax rates.